Bangkok--21 May--Moody's
Moody's has assigned its first-ever ratings to the government of Cambodia, placing foreign-currency and local-currency government bonds at B2. The outlook for all ratings is stable. Moody's also assigned a foreign-currency bond ceiling of B1 to Cambodia, which reflects the government's bond rating and Moody's assessment of a high risk of a payments moratorium in the event of a government bond default. Other newly assigned ratings include a foreign-currency ceiling for bank deposits of B3; a local-currency bond ceiling of Ba1 and a local-currency deposit ceiling of Ba1. All short-term ratings and ceilings are not prime.
"Our ratings reflect the country's relatively high, but concessional, government and external debt, as well as recent, gradual improvement in fiscal and balance-of-payments performance," said Moody's Vice President Thomas Byrne. "Cambodia has also recently attracted significant inflows of foreign direct investment into such sectors as tourism, garments and energy, which should help to continue to boost the overall level of investment in the economy as well as to strengthen the balance of payments."
Such inflows, he explained, coupled with steady disbursements of concessional official development assistance, have offset current account deficits and have contributed to a build-up in official foreign exchange reserves to a level which is adequate relative to the country's near-term debt repayments, thereby providing some buffer to external shocks.
Restructuring of debt owed to multilateral and official bilateral government creditors has improved the country's debt-servicing profile.
Moody's ratings anticipate that the pending restructuring of legacy debt owed to Russia and the United States, incurred before the formation of the new national government in 1993, will also be done on highly concessional terms.
"The ratings also take into account recent stability achieved in Cambodia's young, democratic political system since the 2003 elections," said Byrne. "However, the very weak state of governance—in terms of overall effectiveness of government operations, regulatory quality and rule of law—adversely affect Cambodia's credit fundamentals."
He said continued improvement in such institutional factors should strengthen the country's investment climate and thereby help boost long-term economic growth and lift Cambodia's low level of national income. Until Cambodia is able to broaden its narrow economic base—which is concentrated on agriculture, tourism and garment exports—it will remain vulnerable to domestic and external shocks.
"We see other structural weaknesses that constrain Cambodia's credit fundamentals and macroeconomic policy flexibility, including the financial system's very high degree of dollarization and low level of intermediation and the government's weak revenue base," said Byrne.
"Moreover, Cambodia still remains highly dependent on concessional official development assistance which, for the time being, compensate for structural weaknesses in the budget and balance of payments."
He said that even with such external assistance, Cambodia's key fiscal ratios—namely government revenue-to-GDP and government debt-to-revenue—compare unfavorably with most other B-rated countries notwithstanding their improving trend.
He offered that improvement in the government's weak revenue performance, which would help wean the budget from dependence on official development assistance, would improve Cambodia' fiscal position and place upward pressure on the rating. In addition, he said, improved competitiveness in the country's garment sector, continued growth in tourism, and timely, well-managed development of Cambodia's relatively large proven reserves of oil and gas would help strengthen the fiscal and external payments positions of the country over the long term.
"The risks to the ratings include a deterioration in the competitiveness of Cambodia's garment industry such as from heightened competition from Vietnam now that that country has acceded to the WTO or from a lifting of safeguards in the European Union and the United States on garment imports from China in the next two to three years. Other important ratings risks include a pandemic outbreak of Avian influenza which adversely affects the tourism industry and domestic economic activity, and an onerous rescheduling of debt owed to the Russian and United States governments,"said Byrne. In addition, Cambodia will remain vulnerable to high oil prices until it develops its offshore hydrocarbon reserves.
New York
Vincent J. Truglia
Managing Director
Sovereign Risk Unit
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Guido Cipriani
Senior Vice President - Team Leader
Sovereign Risk Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Thomas J. Byrne
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653